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2010 (8) TMI 11 - AAR - Income TaxSupply of software -supply of software license - installation and commissioning of software - upgradation, maintenance and support of the software - fee for technical services (FTS) - Royalty u/s 9(1)(vi) - Held that - . In the definition of royalty under the Act, the phrase including the granting of a licence is found. That does not mean that even a non-exclusive licence permitting user for in-house purpose would be covered by that expression. - Apparently, grant of licence has been referred to in the definition to dispel the possible controversy a licence - whatever be its nature, can be characterized as transfer. - as the law now stands, the owner need not necessarily grant licence for mere reproduction or adaptation of work for one s own use. Even without such licence, the buyer of product cannot be said to have infringed the owner s copyright. When the infringement is ruled out, it would be difficult to reach the conclusion that the buyer /licensee of product has acquired a copyright therein. - whether copyright has been transferred or not is the line of inquiry which should precede the application of clause (v). It is, however, not necessary to consider the implications of Section 115A in detail, having regard to the clear provision in Tax Treaty. It is well settled that an assessee can seek the benefit of Tax Treaty (DTAA) irrespective of the provisions in domestic law. - It may be noted that in AAI case (2010 -TMI - 75810 - AUTHORITY FOR ADVANCE RULINGS), customization of software was involved and moreover the software had to be modified and adapted as per the requirements at the site. None of these features are present in the instant case - the amount payable under SLTC contract to the applicant does not amount to royalty within the meaning of Article 12.4 of DTAA (Tax Treaty) between India and The Netherlands, nor can it be treated as fees for technical services
Issues Involved:
1. Taxability of income from offshore supply of software. 2. Classification of income as royalty under Section 9(1)(vi) of the Income-tax Act, 1961, and Article 12 of the DTAA between India and the Netherlands. 3. Classification of income as fees for technical services under Article 12.5 of the DTAA. Detailed Analysis: 1. Taxability of Income from Offshore Supply of Software: The applicant, a company incorporated in the Netherlands, supplied special-purpose computer software to ONGC in India. The software was delivered by air, with ONGC as the consignee, and the consideration was received outside India in US dollars. The contract included the supply of software licenses, installation and commissioning by an affiliate (Schlumberger Solutions Pvt. Ltd.), and training and post-warranty AMC, which were later excluded from the applicant's scope of work. The key question was whether the income from this offshore supply would be taxable as royalty or fees for technical services in India. 2. Classification of Income as Royalty: The applicant argued that the income from the supply of software should not be classified as royalty under Section 9(1)(vi) of the Income-tax Act or Article 12 of the DTAA. The Revenue contended that the income should be classified as royalty, asserting that the license granted to ONGC included rights in respect of the copyright of the software. - Legal Precedents: - The Authority referred to previous rulings in FactSet Research Systems Inc. and Dassault Systems K.K., which distinguished between the transfer of a copyrighted product and the transfer of rights in respect of the copyright. - In FactSet, it was emphasized that the term "copyright" should be understood in accordance with the Indian Copyright Act, 1957, and that merely providing access to a copyrighted product for internal use does not constitute a transfer of copyright. - Dassault Systems further clarified that a non-exclusive, non-transferable license to use software does not amount to a transfer of rights in respect of the copyright. - Agreement Analysis: - The Agreement between the applicant and ONGC granted a non-exclusive, non-transferable license to use the software, with restrictions on modifying, reverse engineering, or distributing the software. The intellectual property rights remained with the applicant. - The Authority concluded that the license granted did not confer any rights in respect of the copyright to ONGC, and thus, the income could not be classified as royalty under Section 9(1)(vi) or Article 12 of the DTAA. 3. Classification of Income as Fees for Technical Services: The Revenue also argued that the income should be classified as fees for technical services (FTS) under Article 12.5 of the DTAA, citing the need for domain knowledge and expertise to make the software functional. - Legal Precedents: - The Authority referred to the ruling in Airport Authority of India (AAR No. 819 of 2009), where the supply of software was part of a package that included extensive technical services and training, thus qualifying as FTS. - Agreement Analysis: - In the present case, the installation, commissioning, and training were excluded from the applicant's scope of work and were to be carried out by an affiliate. The applicant did not undertake any technical services or make available its technical knowledge to ONGC. - The Authority concluded that the predominant nature of the contract was the supply of software, and it did not involve the provision of technical services. Therefore, the income could not be classified as FTS under Article 12.5 of the DTAA. Conclusion: The Authority ruled that the income from the offshore supply of software to ONGC: - Does not amount to 'royalty' under Article 12.4 of the DTAA between India and the Netherlands. - Cannot be treated as 'fees for technical services' under Article 12.5 of the DTAA. The ruling was pronounced on August 6, 2010.
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